The European Corporate Sustainability Due Diligence Directive entered into force on 26 August. Although implementation will begin for large companies from 2026, it is not only large companies that will have to adapt to the new legal requirements. Indirectly, SMEs that do business with them will also be strongly affected.
The chain of activities
The key is the concept of the «activity chain». According to the text of the Directive, large companies will also have to carry out at least annual assessments of their subsidiaries and value chains in a comprehensive manner, both upstream and downstream. That is:
- Upstream, business partners engaged in the production of goods or the provision of services. This includes activities such as the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of products and product or service development.
- Downstream, trading partners who carry out activities related to the distribution, transport and storage of the product.
The Directive requires all large companies to take responsibility for ensuring sustainability in each of these links. It is not enough to verify practices within the company itself. Rigorous monitoring of the entire network of business relationships, both direct suppliers and indirect suppliers who, while not interacting directly with the company, contribute critical inputs or services, is also mandatory.
Which business partners are not affected by the Sustainability Due Diligence Directive
Which business partners are not affected by the Sustainability Due Diligence Directive
On the other hand, the following are exempted from the concept of a chain of activities: trading partners engaged in the disposal of the product and in the distribution, transport, storage and disposal of a product subject to a Member State’s export control or export control on arms, munitions or war material.
Obligations of SMEs in the activity chain
In general, the new Directive applies directly to companies with more than 500 employees and a worldwide net turnover of more than EUR 150 million. In certain high-risk sectors the limits are reduced to 250 employees and €40 million.
In theory, therefore, SMEs are excluded from this direct obligation. In practice, all companies that are part of the activity chain of a large company will have to face indirect obligations. For example, they have to have environmental and human rights plans and to carry out audits and reports. Regardless of whether they are SMEs or not. The reason is that large companies affected by the Directive will require them to comply with certain standards so that they do not themselves violate the requirements imposed.
Financial assistance
Adapting to these new requirements will undoubtedly cost SMEs time and money. SMEs serving large companies will need to invest in new technology, training and consultancy services to comply with the requirements of the Sustainability Due Diligence Directive. The good news is that the EU and national governments will be able to offer support programmes and funding to mitigate some of the costs.
In addition, complying with sustainability standards can improve competitiveness and open up new business opportunities for SMEs, as it will make them more attractive to large companies that need to comply with the Directive. At Confianz we can help your SME to meet these requirements.